How investments [don’t] work.

The title is not a question. But there is a fat chance you guessed that. So let’s get to it.

Before we start, here is the motivation for writing this — I got a customer call 2 days ago, wanting to know if Prospareto will be able to do better than his new contact who can “earn 10% returns every month from stocks.” I humbly bowed down before the goddess of misinformation and suggested he stay 100 feet away from that stock market superstar.

Now like it or not, most people lose money in the markets actually fail because they have wrong expectations. After all, you can buy an F-16 but that’s not going to go from ground to cruising altitude in a blink of an eye.

Stats say that most new entrants don’t survive the markets for more than 3 years (6 months if they are into derivatives). But ask someone who has stayed longer and he will agree that wrong expectations produced more failures than anything. Better ask someone who has survived any of the market crashes (Corona doesn’t stand in front of 2008, or worse 2000) and they will agree.

So in the next 2 minutes, I am going to present hardcore facts, verified by data, that will allow you to have the right expectations from your investment activities.

1. Let’s begin with this: no one, no one will always be correct in their investment selection. Warren Buffet has made mistakes, Charlie Munger has made mistakes, Rakesh Jhunjhunwala has had bad investments. Even the best of the experts will be humbled by the markets at times.
2. Not all of your stocks will start to rise the moment you invest in them. Stock Markets are an efficient price discovery mechanism and price movements keep happening all the time, even if it means they can go below your investment price for a little while.
3. Even the best of companies have given mute profits for long terms. Reliance share price barely moved in the 4–5 years before Jio. HUL price stayed in a tight range for many years. But while many investors complained of gains not coming fast enough, smart ones knew the great companies were building something. The impatient ones sold out, the patient ones were rewarded with bonus issue and a stupendous price rise.
4. TCS has a lifetime CAGR (year on year percentage growth) of above 30%, Infosys of about 20%, Eicher of around 20%. There are many more examples. But it didn’t happen from day 1. It took years of patient execution by the company’s management that saw the stock price, and investor returns grow over time.

Lastly, you must have seen those memes that say, “If you had invested 1 lakh in Rs. xxxx in year yyyy, your net worth would have been Rs. zzzzzzzzzzz.” They forget to mention that many did make that investment in year yyyy. Yet only a handful made Rs. zzzzzzzzzzz because they were patient enough to wait while the great companies selected did their job.

So if you really want to be successful, understand that your investments will have their days, months, years of negative returns.

You just start by understanding the risks involved, choosing the right companies, and then committing to them despite temporary market movements. The only reason to drop an investment midway should be when you see a change in the conditions, invalidation of assumptions, that made the company look like a great investment in the beginning.

Making your wealth through direct equity investments is hard. That is why so few do it. But those who do make it, are successful beyond their wildest dreams. Decide who you want to be 10 years from now — someone who says “markets don’t work,” or someone who doesn’t care what the others have to say because guess what, they did make it to the happy and prosperous club.